Learning how to choose the right home equity loan can help you save money and find the ideal loan to fit your individual needs. Two popular choices for tapping into the equity of a home, include a traditional home equity loan and a HELOC (home equity line of credit). While the rates for both may be similar, a home equity loan rate is typically fixed, while a HELOC is adjustable and may fluctuate throughout the life of the loan. The amount you can borrow for either a home equity loan or a HELOC is dependent on the equity you have built in your home. This is the appraised value of your home minus any outstanding mortgage or other liens against the home. Here are some pros and cons of each to help you choose the right home equity loan for your needs.
Why choose a home equity loan?
If you have a home improvement project or other significant expense, a home equity loan can provide you cash in the form of a lump sum payment for any need. A big pro of selecting a home equity loan is the security of a fixed interest rate. It’s the ideal choice if you would feel more comfortable budgeting for a fixed monthly payment that doesn’t change. It’s also the right choice for those who know how much they need and when they need it. An example might be a kitchen remodel or to cover a large medical bill. As we mentioned above, the interest rate is typically fixed, so you will repay the loan at this fixed rate over a set number of years. This set monthly payment will include both principal and interest.
Why choose a HELOC?
A home equity line of credit is most useful to homeowners who want to borrow for expenses they will incur over time. It’s a credit line that can be drawn on as the need arises during a set draw period. This makes it a flexible solution for many needs. A HELOC typically has a variable interest rate, which may be lower than a fixed home equity loan rate. It’s important to note that you may be required to make interest-only payments during the draw period. Once that draw period is over, you can no longer draw down on the line of credit. At this time, you will begin your repayment period. During this time you make both principal and interest payments until the balance is paid in full. You will repay only what you use, plus interest.
3 Pros of both home equity loans and HELOCs
- A home equity loan or HELOC can be a better choice than a personal loan or credit card for many large expenses. The interest rates on home equity loans are typically lower than unsecured personal loans and credit cards because your home is used as collateral.
- You can use the loan for any reason. Yes, you can use funds from a home equity loan to do anything from a home remodel or expensive car repair to funding your child’s education, paying an emergency expense, or for any large purchase.
- The interest you pay for a home equity loan or HELOC may be tax-deductible in certain instances when it is used for substantial home improvement. Speak to your tax advisor for more details on this. You can also learn more on the IRS website. According to the IRS, you can only deduct the interest paid on home equity loans when the loan proceeds are used to buy, build, or substantially improve their main home or second home.
Guthrie Community Credit is a great option for low rate home equity loans
Guthrie Community Credit Union is currently offering a special, low-rate promotion on home equity loans. Tap here for complete information on the home equity loan offer. Please note that with any loan secured by your house, missed or late payments can put your home in jeopardy.
Speak to a Guthrie Community Credit Union representative to learn which loan may be better for your needs.